The Financial Planning Process

It is essential that all of us have some goals in life. Short-term goals include a good job, great career, and small investments. Long-term goals include buying a house, children’s education, retirement policies, etc. Financial planning is one of the most crucial decision of one’s life. If you start planning early, you can get out of a financial mess that can arise later in life. It is very common to spend more than what you earn. Of course, there are facilities, like credit cards, buy now pay later schemes, installments, etc., which compel one to overlook their finances. At the end of the month, when bills keep pouring in your mail boxes, you find yourself in a sticky situation. And this mounting bill payment adds a semi-colon to your long-term dream of owning your own house. Sometimes, medical emergencies also forces you to dig into your children’s education fund. Marriage plans for your only daughter? You borrow some money from your retirement fund. There goes the trip to Egypt, you have planned all those years!

The answer to all the above mortifying financial situations is ‘Financial Planning’. The planning process helps give a direction to your financial decisions. It helps you decide various investments that can bail you out of your financial problems. For example, investment in mutual funds may help you repay the loan or save enough for your retirement. Once your financial goals are set, it helps make your life more secure and flexible for any financial emergency that may arise.

You can carry out your own financial planning by taking a guidance from self-help books, newspapers, magazines, the Internet, or discussing your financial needs with your spouse. If you feel, you can’t handle it yourself, then opt for a professional financial planner. This Buzzle article, will help explain process related to financial planning.

Six Steps of Financial Planning Process

It is important to be well versed with the entire process of financial planning. This will help you plan major updates of your life as well as unseen occurrences. It is you who needs to be in control of your finances, not the other way round.

Establish Mutual Relation

Develop a relationship of trust and respect with your financial planner. The purpose is to help both parties know what is to be expected. During this stage, the services that the financial planner will offer you should be discussed in detail. It is also the right time to decide how will the financial planner be compensated for his/her services. You can also come to a decision as to who will keep a track of the finances once invested.

Assemble Data

The financial planner will meet you and discuss your financial situation. You should come to a mutually agreed goal regarding your financial and personal goals. You should decide the time period and the expected results from your investments. You should be made aware of all the risks, if any, involved. The financial planner should help you make the financial goals, which can be made possible from utilizing your current income into savings and investment program.

Estimation and Assessment of Current Financial Status

Your current financial situation should be assessed by your financial planner to decide the plan of action. This may include estimation of your current assets, liabilities, and cash flow. The insurance coverage, investments, and tax strategies are also considered.

Presenting Recommendations and Alternatives

The financial planner should prepare an investment program based on the information provided by you regarding your financial goals. The planner should explain the recommendations and inform you about all the minor details. This will help you decide your financial move. He should also be able to come up with alternatives, if you are not satisfied with the recommendations offered.

Execution of Financial Planning Recommendations

The planner becomes your guide during the implementation of the recommendations of the financial goals. He takes decisions on your behalf and coordinates with your attorney and stock brokers.

Management and Auditing Financial Plan

You and your planner should decide who will keep a track of your investments. If your planner is in-charge, he should give you periodic reports on your financial situation. If there are any sudden changes in your life, he should be able to give you alternatives for the same.

It is wise to set goals, which are achievable during the financial planning process. If you understand the importance of becoming financially stable, planning for the future will become very easy. You should take into consideration all the possibilities that can affect your life due to your financial decisions. It is good to start early in life and not wait till you near retirement age. You should get over the notion that financial planning is for rich people. Investments should not be considered as financial planning. You should be in-charge of your money and monitor it at every step. It is wise to plan your finances according to your income. Better be well-prepared financially, before a crisis comes barging at your door. In this unpredictable world, it is best to have a safe financial security, not just for yourself, but for the future of your whole family.

Importance of Financial Planning

A broad definition of personal financial planning can be stated as, “a process of determining an individual’s financial goals, purpose in life, and life’s priorities, and after considering his resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals.”

Financial Planning

It is a process which presents before an individual, organization, or even a country, the current financial position and the adjustments in the spending pattern, in order to meet the goals.

Importance of Financial Planning

It is important to plan finances in order to reap long term benefits through the assets in hand. The investments that one makes are structured properly, and managed by professionals through financial planning. Every decision regarding our finances can be monitored if a proper plan is devised in advance. The following points explain why financial planning is important.

– Cash Flow: Financial planning helps in increasing cash flow as well as monitoring the spending pattern. The cash flow is increased by undertaking measures such as tax planning, prudent spending, and careful budgeting.
– Capital: A strong capital base can be built with the help of efficient financial planning. Thus, one can think about investments, and thereby improve his financial position.
– Income: It is possible to manage income effectively through planning. Managing income helps in segregating it into tax payments, other monthly expenditures, and savings.
– Family Security: Financial planning is necessary from the point of view of family security. The various policies available in the market serve the purpose of financially securing the family.
– Investment: A proper financial plan that considers the income and expenditure of a person, helps in choosing the right investment policy. It enables the person to reach the set goals.
– Standard of Living: The savings created by through planning, come to the rescue in difficult times. Death of the bread winner in a family affects the standard of living to a great extent. A proper financial plan acts as a guard in such situations, and enables the family to survive hard times.
– Financial Understanding: The financial planning process helps gain an understanding about the current financial position. – Adjustments in an investment plan or evaluating a retirement scheme becomes easy for an individual with financial understanding.
– Assets: A nice ‘cushion’ in the form of assets is what many of us desire for. But many assets come with liabilities attached. Thus, it becomes important to determine the true value of an asset. The knowledge of settling or canceling the liabilities comes with the understanding of our finances. The overall process helps us build assets that don’t become a burden in the future.
– Savings: It is good to have investments with high liquidity. These investments, owing to their liquidity, can be utilized in times of emergency and for educational purposes.

The argument made by people from low income groups is that they don’t need to plan their finances due to the less money they possess. However, no matter how much one earns, better planning of income always helps in the long run.